Doyle Watson, DVM
The value of something we wish to own is typically based upon the future benefit we expect from owning it. We can expect no benefit from the past. That has been enjoyed by the previous owner. We can, however, determine the previous benefit provided to its current owner and project that to some extent into the future to determine what its value may be to a future owner.
Historically the great majority of general small animal veterinary practice valuations have been based upon an income approach whereby earnings (profits) projections are “capitalized” to some extent to determine current value. The earnings (profit) would be considered to be the return on the investment as if it were an “out of pocket”, green cash investment without the involvement of a loan and subsequent debt service.
So why is this important to you as a practice owner, or you as a prospective owner, or Simmons as a practice appraiser? The reason again is that the times they are a changin’! …Maybe, but hopefully not.
Since the beginning of March 2020, the economic world as we have known it has experienced dramatic and critical upheaval. Revenues for most industries are in tremendous decline. The big question on all our minds is “will this continue?” Specifically as to the veterinary practice owner, “Will lower client visits and revenues become the new norm?” Will we have to change the structure of our reception area, exam rooms, drive through patient drop offs, etc to accommodate clients? Will we be able to maintain current average daily transactions? Will average transaction charges change? How will expenses change? How will all this affect future profits? Will practice or industry risk factors change dictating a change in our valuation paradigms?
It is for this reason that a current veterinary practice appraisal is important. Ideally a benchmark should be established through February 2020 and monitored into the reasonably foreseeable future, at least the remainder of 2020. Of course it is our hope, and I do believe all likelihood, that this current COVID phenomenon will have no long-term impact on healthy, well-managed veterinary practices. Indeed, some practices could experience an increase in profits due to an increase in efficiency and the ability to see more patients with less client contact by drop- offs and other measures. However, a poorly managed, unhealthy practice today could have a difficult future if gone undetected and uncorrected.
Therefore, we at Simmons encourage and highly recommend having your practice value assessed at this point so as to establish a benchmark looking back and make necessary corrections in expense mismanagement going forward. If you are considering buying a practice, consideration should be made as to the current economic situation and how the subject practice will weather the storm.
Simmons is committed to the veterinary profession. Reach out to your local office to discuss your valuation. Want to just discuss the market? Give us a call – we are here for you! 800.333.1984 – Connect with your Simmons Advisor